Question

Rob's Shameless Self-Promotion Sales (RSS-PS) Inc. is a Canadian-controlled private corporation located in London, Ontario. For its fiscal year ended December 31, 2014, the corporation had correctly calculated its income for tax purposes under Division B as follows:

ITA: 123-127, 129, 186

From Canadian Source:

Consulting Income...160,000

Advertising Agency Loss... (30,000)

Rental Income from warehouse fully rented on a five year lease.... 20,000

Retailing Income ... 75,000

Interest on outstanding accounts receivable in retailing business ... 25,000

Recapture of CCA from sale of fixtures used in retailing business ... 25,000

Interest income from five-year bonds ... 75,000

Taxable Capital Gains ... 70,000

Dividends from non-connected taxable Canadian Corporations... 12,000

Total: Division B net income for tax purposes 432,000

Additional information

RSS-PS Inc. made the following selected payments during the year:

Scientific research and experimental development (current expenses)... 100,000

Charitable Donations... 14,000

Taxable Dividends ... 120,000

The balances in the tax accounts on December 31, 2013 were:

Charitable Donations from 2011... 1,000

Non- Capital losses from 2010... 56,000

Net capital Losses from 2010... 12,000

Refundable dividend tax on hand... 20,000

Dividend refund for 2013... 9,000

RSS-PS Inc. allocated $370,000 of its $500,000 business limit to other associated corporations. The only scientific research and experimental development expenditures of the associated group were made by RSS-PS Inc.

Rob has asked you to:

(A) Compute the federal Part I tax and provincial tax at a 11.5% rate on federal taxable income for the 2014 taxation year, and

(B) Compute the dividend refund for 2014 and the amount of any RDTOH to be carried forward.

Answer 1

Solution 11

	ABI		Investment	Cdn Dividends	Total
Source	Cdn.	For ‘n.	PSB	Cdn.	For’n	Conn.	Port.
Consulting............	$ 160,000						$ 160,000
Advertising...........	(30,000)							(30,000)
Rental...................				$   20,000				20,000
Retailing...............	75,000							75,000
Interest on A/R.....	25,000							25,000
Recapture.............	25,000							25,000
Interest income.....				75,000				75,000
Tax. cap. gain.......				70,000				70,000
Dividends.............							$    12,000	12,000
Foreign sources....		$ 23,000			20,000			43,000
Div. B Income......	$ 255,000	$ 23,000	Nil	$ 165,000	$ 20,000	Nil	$    12,000	$   475,000
	Net income for tax purposes.......................................................................	$ 475,000
	Deduct:
	Charitable donations ($1,000 + $14,000).................	$   15,000
	Dividend income............................................................	12,000
	Non-capital losses..........................................................	56,000
	Net capital losses ($18,000 ´ 1/2 - 3/4).........................	12,000	95,000
	Taxable income.............................................................................................	$ 380,000
	Federal tax @ 38%........................................................................................	$ 144,400
	Federal abatement (10% ´ 90% ´ $380,000)..........................................	34,200
	Net....................................................................................................................	110,200
	Surtax @ 4% of 28% of $380,000.............................................................	4,256
	Additional refundable tax:
	62/3% of lesser of:
	(a)   Aggregate investment income ($165K + $20K – $12K)....................................................................	$ 173,000
	(b)   Taxable income – SBD eligible income ($380K – $130K)..................................................................	$ 250,000	11,533
	Total.................................................................................................................	125,989
	Less:
	business income foreign tax credit (given)................	$     7,581
	small business deduction (see Schedule 1)................	20,800
	general reduction (see Schedule 2)..............................	5,390
	investment tax credit (35% ´ $100,000)...................	35,000	68,771
	Part I tax payable (federal).........................................................................	57,218
	Provincial tax @ 13% ´ $380,000 ´ 90%.................................................	44,460
	Dividend refund.............................................................................................	(40,000)
	Total tax..........................................................................................................	$   61,678
Schedule 1: Small business deduction
16% of least of:
Income from Canadian active business..........................................................................	$ 255,000 (A)
Taxable income...........................................................................................	$ 380,000
Less: non-business foreign tax credit ´ 10/3..................	Nil
business foreign tax credit ´ 3 ($7,581 ´ 3)....................	$     22,743	22,743	$ 357,257 (B)
Business limit ($300,000 – $170,000).....................................................................................	$ 130,000 (C)
Small business deduction (16% of $130,000)........................................................................	$     20,800

Schedule 2: General reduction:
taxable income.............................................................		$ 380,000
less: 100/7 of the M&P profits deduction..............	$          Nil
100/16 of the small business deduction........	130,000
AII........................................................................	173,000	(303,000)
net...........................................................................................		$    77,000
7% of $77,000......................................................................			$       5,390 ========
(B) Refundable Portion of Part I Tax
Least of
(a)   262/3% ´ aggregate investment income
[262/3% ´ ($165,000 +$20,000 – $12,000)]....................................	$    46,133
Less: non-business foreign tax credit.....................................	Nil
minus: 91/3% ´ foreign investment income
[91/3% ´ $20,000]...............................................	(1,867)	Nil	$    46,133
(b)   Taxable income...........................................................................................	$ 380,000
less: income eligible for the SBD...............................................................	(130,000)
25/9 ´ non-business foreign tax credit.............................................	(Nil)
3 ´ business foreign tax credit ($7,581)...........................................	(22,743)
262/3% ´	$ 227,257	$    60,602
(c)   Part 1 tax minus surtax ($57,218 – $4,256)...................................................................	$    52,962
Refundable Portion of Part I tax – least of (a), (b), (c).........................................................	$    46,133
Part IV Tax on Taxable Dividends Received
Taxable dividend subject to Part IV Tax........................................	$    12,000
Part IV tax payable (1/3 ´ $12,000)..................................................	$       4,000

Refundable Dividend Tax on Hand
RDTOH, end of last year....................................................................	$    20,000
Dividend refund for last year.............................................................	(9,000)
Add: refundable portion of Part I tax from above........................	46,133
Part IV tax.............................................................................................	4,000
RDTOH at end of year.......................................................................	$    61,133
Dividend refund – Lesser of:
1/3 ´ taxable dividends paid (1/3 ´ $120,000)	$    40,000
RDTOH at the end of the year..........................................................	$    61,133
Dividend refund...................................................................................................	$    40,000
RDTOH carryforward ($61,133 – $40,000)...................................................	$    21,133